Posted by: Josh Lehner | June 29, 2022

State and Local Pandemic Revenues

It’s no secret that the inflationary economic boom has translated into very strong public sector tax revenues. It’s the reason Oregon is currently facing a record kicker. These strong collections are nationwide and not a local phenomenon. 49 states saw revenues come in above projections this past year.

The combination of an underlying strong economy and sharp increases in non-wage forms of income, like corporate profits and capital gains, means that state and local taxes as a share of personal income are higher today than any point in recent memory as seen in the latest edition of the Graph of the Week. The chart focus on the big 3 taxes that state and local government levy, as regularly published by the Census Bureau.

That said, there is tremendous nuance and variation here that is worth spending a minute discussing.

First, some of these really strong gains are clearly temporary and will either fall or more likely crash back to earth in the quarters and years ahead. This is not a permanent shift to higher taxes but rather reflects pandemic factors and/or taxpayer behavior. The typical state is forecasting General Fund growth of just 1.2% this upcoming fiscal year, which will bring revenue as a share of income lower. Our office’s forecast is for a year-over-year decline in General Fund revenues coming off such highs.

Second, general sales taxes will retreat as consumer spending shifts back into services to a greater degree. Even if spending on goods holds steady in the years ahead, spending on goods as a share of income and as a share of overall spending will decline. This will impact most states’ sales taxes which generally only apply to physical/retail goods and not services. This will not be the case in Oregon where our new(ish) corporate activity tax (CAT) applies to goods and services alike. Policymakers designed Oregon’s CAT to be more immune to the tax base erosion other states have experienced in recent decades. Retail deflation will further erode sales tax revenue in the years ahead.

Third, due to property tax restrictions in quite a few states, property taxes are growing, but not seeing the same sort of growth as underlying economic activity, let alone property valuations would suggest. In Oregon, it is likely property taxes as a share of income are declining.

All of this brings me to my main point. There is tremendous variation between state and local government revenues today, and really across different local government jurisdictions all based upon their mix of revenues.

For instance, if we look across the country, about 90% of income taxes are state revenues versus 10% going to local governments. Similarly sales taxes are roughly 75% state and 25% local. So the biggest categories of public revenues, and the ones growing the most during the pandemic are primarily state resources and not local. On the other hand property taxes are 97% local and only 3% state.

As such, jurisdictions that are only or primarily funded by property taxes are seeing the slowest revenue gains. This is the basis for the title of the chart. States are seeing stronger revenue gains while some local jurisdictions without diverse revenue streams are seeing weaker.

Now, local governments’ revenues overall are roughly 1/3 transfers from the federal and state government, 1/3 property taxes, and 1/3 everything else. So local government revenues are growing, in part due to the large ARPA transfers and shared state revenues, and most of the things in the all other category are growing too, even if property taxes are growing slowly, especially in a state like Oregon.

At a high level, every public entity is facing the same inflation and cost pressures, and the same tight labor market now that full employment is here. However some jurisdictions are seeing correspondingly strong revenue growth — some even get to keep it to provide public services — while other are seeing solid gains but that are making ongoing budget choices more challenging than you might think.

Update: one macroeconomic implication is that strong state and local revenues, and accumulated reserve funds will offset some of the declines in federal spending after the pandemic programs ended last year

Posted by: Josh Lehner | June 21, 2022

Priced Out Oregon Households

The housing market has been overheated during the pandemic. Between strong household finances and demographics, demand has outstripped supply. The result is both for rent vacancies and for sale inventories are low. Rents and home prices have increased considerably.

The mortgage rate shock so far this year is changing the housing market dynamics. 30 year mortgage rates have risen from around 3% at the end of 2021 to just over 6% in recent days. When combined with ongoing price appreciation, this means the cost of a mortgage payment has increased 40-50% in just a handful of months.

The impact here is that the potential pool of homebuyers for the median priced home has been effectively cut in half as seen in the latest edition of the Graph of the Week. It used to be that more than 1 in 3 households in the Portland region could afford to buy the median home but that has fallen to less than 1 in 5 at today’s prices and interest rates. Our office estimates that 168,000 Portland area households have can no longer afford the typical home sold based on these changes. In the Bend metro area only about 1 in 10 households can afford to buy the median home sold today, a reduction of 9,000 households compared to just a few months ago.

There are a lot of implications from this erosion in ownership affordability.

First it means less demand to buy homes today. Or at least fewer qualified buyers. Fed Chair Powell said the housing market needed a reset. Our office’s baseline outlook is for sales to drop in the months ahead. Price appreciation will slow considerably. Housing starts are likely to decline in the back half of the year. (Nationally, builders are seeing more cancellations and having to bring back incentives and price reductions.) That forecast was developed 6-8 weeks ago and mortgage rates have risen even further since, meaning that these market changes could end up being more pronounced than anticipated. We shall see how financial markets evolve in the coming weeks.

Second, for sale inventories will increase. In Portland, active residential listings are up 19% when looking at May 2021 to May 2022, however May 2022 was still the second lowest May on record. Inventories are still about half of what they were in the years leading up to the pandemic. So even, as inventories rise and there are more buying opportunities, there may be more price pressure than you might think looking at interest rates alone. We are just moving away from such an extreme seller’s market to something that’s at least a bit more balanced. Ultimately how far the pendulum swings is still to be determined. These changes usually take time to develop and with inventories coming off of record lows there is a long way to go.

Third, we know these affordability changes impact credit-sensitive buyers much more. This includes younger households and first-time homebuyers who need to finance their home purchase. Investors and long-time homeowners who have a lot of equity are less affected as they do not necessarily need to fully finance a purchase. See our office’s recent Twitter thread for more charts on these generational/demographic impacts.

Fourth, this means increased demand for rentals and ongoing rent increases as potential buyers are priced out. Whether these rental price increases ultimately result in reversing the increase in household formation during the pandemic is still unknown. It is also possible that the rental stock will increase as some builders who cannot find individual buyers will turn toward the Build For Rent market to offload properties.

Finally, there are a few things we don’t know or haven’t seen yet in the data. Just how strong are finances for middle- and upper-income households? Are they able to weather these higher costs more easily than you might think? How quickly will seller expectations and the market rebalance to this new reality?

Portland area home sales are down just a little bit in April and May on a seasonally adjusted basis. But we have yet to really see the impacts of the higher rates in the data. This is generally true across some other West Coast markets. Given these markets are underbuilt overall, it could be that they are a bit less sensitive to these changes than some inland markets. Even so, Oregon is not immune to these changes and overall dynamics. Data in the coming months should show the impacts.

Bottom Line: Our office’s long-standing concern is our lack of housing production. Worse affordability impacts Oregon household’s every day, and could slow future economic growth due to fewer people being able to move here and increase displacement risks. While the recent run-up in mortgage rates is problematic for those looking to buy or sell a home this year, it is likely to be more of a temporary adjustment period in the big picture. Longer-term we know housing demand will be solid given income growth and demographics. Oregon needs to see continued gains in new construction.

Bonus Graph of the Week. I tried. I promise you I really tried to keep this to just one chart but after I put this together I couldn’t keep it out because it tells an important part of the story. As Altos Research’s Mike Simonsen says, one key metric to watch are price reductions. If price reductions are more common that’s indicative of lower effective demand at today’s prices, and that buyers are running into their invisible price ceiling as Zonda’s Ali Wolf calls it. Today there are more price reductions than there have been in years in the Portland market, but again, coming off these really low rates of the extreme seller’s market. Note how the price reductions are accelerating during the spring selling season this year, whereas they typically peak late summer or early fall for those who missed out selling during the peak season.

(Note that Zillow only has weekly data for the largest 100 metros so we do not have other Oregon data besides Portland to compare.)

Posted by: Josh Lehner | June 16, 2022

Boom/Bust Alternative Scenario

“Inflationary booms traditionally don’t end well.”

Mark McMullen, State Economist

That was Mark back in our forecast release in February. Since then inflation has continued to stay elevated, and inflation expectations are creeping higher. Yesterday we saw a noticeably more hawkish Federal Reserve in terms of their outlook and expected policy path moving forward.

As Fed Chair Powell says, a sustained economic expansion requires price stability. One of the challenges is that the near-term economic path looks pretty much the same regardless of if we are headed for the soft landing or the recession as part of a boom/bust cycle. We need to, and currently are seeing tighter financial conditions taking some of the froth out the stock market, housing cool noticeably from its overheated pandemic days, and consumer spending shift back into services and out of goods. Even as the economy is delivering the things we need to see to get the good outcome, the pessimism overall is growing. As we noted in our most recent forecast, recession are in part psychological events driven by what John Maynard Keynes called “animal spirts.”

With that in mind, let’s take a look at the Boom/Bust alternative scenario our office has been incorporating into our forecast for the past year. Now, the baseline outlook is still the most likely path for the Oregon economy, and the baseline remains the soft landing and a continued economic expansion. However, our office believes the most likely alterative path for the economy is some sort of stronger boom this year followed by a bust in the next year or two.

Keep in mind that this is a stylized scenario. The economy is unlikely to unfold exactly as described here but this sheds some light on the potential causes and consequences of such a scenario.

Boom/Bust Scenario:

The inflationary boom continues. By late this year, employment, income, and spending are all 2-3 percentage points higher than the baseline. Corporate profits are up even more. The unemployment rate drops to 3 percent by late summer or early fall. Inflation cools from today’s highs but remains closer to 5 percent. The Federal Reserve raises interest rates more aggressively. The policy goal is to cool the economy and bring inflation under control. However, the end result of raising interest rates high enough to actually slow inflation is to send the economy back into recession beginning in 2023. Depending upon the exact timing of the Federal Reserve policy changes, the recession may be pushed out into 2024.

In any future recession, the key will be the severity of the cycle. Today, there is relatively little leverage in the economy. Household debt remains tame, and the labor market is structurally tight, although a recession would make it cyclically weak for a period of time. Without clear imbalances, or leverage in the economy, any ensuing recession is likely to be mild or moderate, and less severe. One risk here is just how entrenched inflation is in the overall economy. A more severe recession would likely be needed to wring out more entrenched inflationary pressures, whereas a milder recession may be needed if most of today’s inflation is transitory, or temporary.

In this boom/bust scenario, Oregon suffers a moderate recession. The state loses 100,000 jobs and the unemployment rate rises to nearly 9 percent. Nominal personal income does not necessarily decline significantly, but rather stalls out for a year and a half or two years. This type of cycle would be similar to the aftermath of the dotcom bust here in Oregon in the early 2000s.

Another key consideration is the relative starting point of the bust. With an economy growing faster than expected this year, the fallout from a recession, when compared to the baseline, is somewhat less severe. In the upcoming 2023-25 biennium, employment and total personal income in Oregon are about 4 percent below baseline.

Growth resumes in early 2025 and the recovery is strong. Oregon’s economy regains full employment and catches up to the baseline outlook in 2027 or 2028.

The revenue implications of the Boom/Bust economic scenario a larger projected kicker this biennium as revenues continue to boom. The ensuring recession after the Federal Reserve hikes interest rates to head off inflation takes a toll on state resources. Revenues in both 2023-25 and 2025-27 are considerably below the baseline outlook. Declines would also be seen among Lottery sales and the Corporate Activity Tax revenues as well as consumers spend less during recessions.

Posted by: Josh Lehner | June 8, 2022

Oregon Construction Outlook, June 2022

Oregon’s construction outlook remains solid in the years ahead. Our office’s employment forecast calls for moderate gains due to the fact the industry is at historic highs today, and the underlying volume of work moving forward should be fairly steady in the big picture. There are a number of balls in the air at the moment that are trying to look at what it would take for Oregon to increasing housing production. Our office will share more when available. But for today let’s take a quick look at a few pieces of the overall industry.

Oregon’s construction workforce is about half residential and half nonresidential. Of course many contractors work on both types of projects, but in terms of the primary nature of their individual businesses this is how the data shakes out. Residential has certainly been more boom/bust over recent cycles, whereas nonresidential is a little more stable in part due to public works.

In total, the construction industry has about a 10% wage premium relative to the statewide average wage. However this masks considerably different wages across occupations and different segments of the industry. Nonresidential construction workers on average make $86,000 per year which is 34% above the statewide average. On the other end, residential construction workers on average make $54,000 per year which is 15% below the statewide average. These differences are important to keep in mind when talking about attracting and retaining workers, or growing the construction workforce to increase housing starts and the like.

Finally, an updated look at our office’s expectations for construction spending by broad category in the years ahead. These spending numbers are adjusted for inflation to get a better gauge of underlying volume of work, but it’s imperfect in that regard.

In terms of the outlook, broadly speaking it’s fairly similar to the last time we dug into it. We should get official Census state nonresidential figures for 2021 any day now. But so far the declines nationally are less pronounced than first feared. It may still be some time before we start building new offices and hotels in our urban cores which weighs on the outlook, but both food and beverage, and amusement and recreation are picking up. Health care should too when hospital finances improve again with more elective surgeries. Warehousing has been astronomically strong but the industry is likely to slow moving forward. Manufacturing has seen strong gains lately as well. All told, nonresidential is doing well even if there are specific weaknesses.

Residential construction will be fine in the years ahead. Our office’s forecast for housing starts are for moderate gains overall, and home improvements should remain strong given the record setting home equity that owners have. However, we do have a year-over-year decline forecasted for 2022 given the mortgage rate shock. It will take some time for buyers to adjust to the new interest rate environment. Monthly payments on new mortgages is through the roof relative to just a handful of months ago. We have seen U.S. new home sales drop, and builder cancellations are starting to rise some. These are expected to be relatively short-term impacts (this year) as the market adjusts, but they should feed into fewer actual housing starts in the months ahead. However, over the coming years, we know housing demand is strong and both housing starts and construction activity will increase.

Lastly in terms of public works there are a few risks to the outlook. Public revenues are quite strong, providing policymakers funding for projects should they so choose. We also have the federal infrastructure bill that passed last year. Those impacts have more of a mid- to late-2020s timing as it takes awhile to get projects designed and up and running. On the other side we have difficult budget choices of where policymakers will choose to allocate their funds, and we have inflation. The cost of building materials is rising by double-digits. That means a dollar of public works builds less than it used. The $1 trillion federal infrastructure package is likely to fully fund fewer projects than originally expected.

Posted by: Josh Lehner | June 2, 2022

Inclusive Economic Recovery

Our economy, and our society have long-standing disparities that remain today. The good news so far this cycle is that when it comes to employment trends and opportunities by age, gender, geographic location, and race and ethnicity, these disparities are not wider today than they were before the pandemic hit. That makes this recovery inclusive, or at least more broadly shared than past recoveries.

That said, two other disparities have widen. Wealth inequality has increased. Even as incomes and wealth have increased across the board, the gains are larger among the upper end of the distribution. This is particularly true for homeowners given the record-setting home equity gains experienced during the pandemic. The gap between the haves and have nots is larger today than two and a half years ago.

The second disparity that widened during the pandemic is employment by educational attainment. Given the nature of the pandemic shock and shutdowns, it was the in-person service industries that bore the brunt of the layoffs. Such positions are disproportionately filled by workers with lower levels of educational attainment. Employment for college graduates barely changed other than some are now working remotely to a greater degree.

The encouraging news today is these educational attainment disparities are lessening. Job growth has been strongest among the hard-hit service sectors. Moving forward a full recovery is expected. Job growth will be more balanced across sectors and based on underlying economic and consumer spending patterns rather than pandemic-related forces.

Finally, it is true that some employment disparities by sex, and race and ethnicity did widen initially in the pandemic. However, they have now closed. Looking at national data, employment trends for Asian, Black, Hispanic or Latino Americans are each a percent or two stronger than for white Americans. In terms of employment by sex, nationally men are a few tenths stronger than women, while here in Oregon trends for women and men are identical. Even the parent gap has effectively closed. Employment rates for moms with young children at home have caught up to the broader labor market trends. Dads are still outperforming by a percent or so, but moms are no longer lagging the overall economy.

None of this means that everything is fine. We have long-standing disparities that remain. And even as the racial poverty gap and urban-rural divide narrowed initially, we know some of that had to do with the large federal aid earlier in the pandemic. From that view, it is possible that those disparities will widen a bit in 2022 and 2023, returning to their pre-pandemic differences. Time will tell. But for now, the fact that the current, strong labor market recovery has also been inclusive is encouraging.

Posted by: Josh Lehner | May 25, 2022

Update on Young Oregonians and the Trades

The labor market is structurally tight. Mediocre demographics are the key reason why. Let’s run through a quick update on young workers in the trades.

First, the good news. The total number of young Oregonians working in the trades is higher today than it has been in two decades. Even as a share of all young Oregonians, such workers are all the way back to where they were at the height of the housing boom.

The rebound in young construction workers following the housing bust took a few years to get going, causing some consternation of a lost generation when it comes to working in the industry. However, young workers have returned and there are just as many now working construction as in the late 1990s and at the height of the housing boom.

Even so, the vast majority of the growth has been in transportation and warehousing, with distribution centers really increasing employment in Oregon in recent years.

Manufacturing production is strong, and the recovery has been much better than anticipated, even as employment remains down a bit. This data indicates manufacturing employment for young Oregonians is down just a bit more than for all ages, which is something to keep an eye on moving forward.

Second, as the red line indicates, the pipeline of new workers into the labor market is more of a steady flow than a big increase. With Baby Boomers continuing to retire, the net growth in Oregon’s labor force will be slower than local businesses have become accustomed to in recent decades. All industries are facing the same demographic crunch, with the trades falling right in the middle of the pack. There will be increased competition to attract and retain workers in the years ahead.

Third, the outlook for businesses looking to hire may get just a little easier in the months ahead, although not necessarily for good reasons. There are an increasing number of anecdotal report that some firms and industries overstaffed during the delta and/or omicron waves. E-commerce and warehousing operations are included. Furthermore, as housing demand cools some as buyers adjust to higher mortgage rates, and consumer spending rotates back into services to a greater degree, the outlook for goods is softening.

As of today none of these changes are particularly worrisome. These patterns were expected, and needed from a macro level to help bring inflation down. Our office’s employment forecast for these industries called for noticeably slower growth. The real risk would be for larger changes and pullbacks leading to sizable job losses. Regardless, for firms looking to hire from this labor pool today, there should be a little less competition, making it a little bit easier to find and retain workers.

Fourth, in terms of finding workers in the structurally tight labor market, a key factor will be the Latent Labor Force. Oregon’s workforce is 53% female, and about 75% white, non-Hispanic (WNH) according to pre-pandemic ACS data. Diversity in the trades is generally lower. At the occupational level, both construction and installation, maintenance and repair jobs in Oregon are 96% male, and 75% WNH. Transportation and material moving occupations are 20% female, and 74% WNH. Production occupations — the manufacturing jobs that actually do the manufacturing — are the most diverse at 25% female, and 66% WNH.

Fifth and finally, let’s take a look at young Oregonians compared to young Americans. Overall, Oregonians are working in the trades to a greater degree than many other states, at least according to this data. Oregon is generally about 1.2-1.3% of the nation. When it comes to younger workers in the trades, Oregon is nearly 1.5% of the U.S. overall. This holds up for construction, manufacturing, and transportation and warehousing individually as well.

Posted by: Josh Lehner | May 18, 2022

Oregon Economic and Revenue Forecast, June 2022

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.

The economy continues to boom. Jobs, income, spending, and production are all rising quickly. However, pessimism about the expansion is growing. First quarter GDP was negative. Inflation is at multi-decade highs, eroding household budgets. Russia’s invasion of Ukraine created an oil shock and raised fears of increased conflict. A new round of pandemic-related shutdowns in China is set to exacerbate global supply chain struggles.

And yet, the U.S. economy is expected to push through. This peak in pessimism based on temporary issues will fade. Consumer spending and business investment have accelerated in recent quarters. Jobs and income will continue to grow. Inflation is set to slow due to the combination of higher interest rates, cooling of goods prices, and moderating household financial conditions. It remains an open question just how much inflation will slow.

The ultimate risk is the economy needs higher interest rates to truly wring inflation out of the system. Should that be the case, the risk of a boom/bust cycle increases. Recessions are in part psychological events, driven by what John Maynard Keynes called “animal spirits.” If firms and households believe there will be a recession and start pulling back on spending and investment, it can create a self-fulfilling event.

Regardless, it is clear the economy has moved into a new phase of the cycle. The dynamics are shifting. No longer is the U.S. or Oregon in recovery mode, but in net expansion territory. The challenges, risks, and trends associated with a mid-cycle expansion are different than those faced during the initial recovery.

The 2022 personal income tax filing season has been shocking. Despite a record kicker credit being claimed, payments rose sharply. Given last year was a very strong year, today’s growth stands out even further.

The surge in tax collections was not unique to Oregon, with all states that depend upon income taxes seeing collections outstrip projections. Across states, high-income tax filers have accounted for much of the growth in personal income tax revenues. A wide range of investment and business income sources are booming. However, as is usually the case, Oregon’s revenue gains during the boom were relatively pronounced. Tax season payments will come in more than $1.2 billion (70%) larger than last year. The typical state has seen around half this rate of growth.

While economic growth remains strong, the large gains in reported taxable income have more to do with taxpayer behavior than they do the underlying economy. Investment and business income are not always realized for tax purposes at the same time as they are earned in the market. Late 2021 was a great time to cash in assets, with equity prices and business valuations high, and potential federal tax increases on the horizon. As a result, income reported on tax returns grew at more than double the rate of economic measures of income.

Given that revenue growth has been driven by nonwage sources of income, most of the recent surge in payments will likely prove to be temporary. After so much income was pulled into tax years 2020 and 2021, less will be realized in the near term. This taxpayer behavior also puts Oregon’s revenues at risk of the sharp declines experienced after asset market corrections in 2001 and 2007. With recessionary risks rising, profits and gains could soon turn into losses, and a smaller share of filers could be subject to the top rate.

The bottom line is that the unexpected revenue growth seen this year has left us with unprecedented balances this biennium, followed by a record kicker in 2023-25. The projected personal kicker is $3.0 billion, which will be credited to taxpayers when they file their returns in Spring 2024. The projected corporate kicker is $931 million, and will be retained for educational spending. Even so, if balances are not spent, net resources for the 2023-25 biennium will have increased by $427 million relative to the March 2022 forecast.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | May 12, 2022

The Economy Could Use Better Productivity

With a structurally tight labor market making it challenging to find workers, and higher wages potentially making it cost prohibitive to hire them if you can find them, what are firms to do? The productive capacity of the economy is the combination of capital and labor it takes to make goods and services. If labor proves more challenging, firms can increase their capital and investment.

Higher productivity would solve multiple economic issues at the same time. It would increase production, alleviating some supply constraints in the economy. It would allow businesses to better afford higher wages and keep unit labor costs lower as a result. Both would be disinflationary relative to the current environment.

To date, productivity in the economy is not much higher than its pre-pandemic trend. Productivity increased initially, in part because firms were forced to make do. Sales were strong but the workforce was smaller. However, as employment has increased in the past year, per worker productivity has largely moved sideways, eroding some of those initial gains. Productivity in the first quarter of this year declined, although the data is noisy and omicron disrupted workplaces to a greater degree.

Moving forward, productivity remains a key, long-run economic measure. Higher productivity would raise the speed limit of overall economic growth, and better keep inflation at bay. There are two potential bright spots that could point toward faster productivity in the years ahead.

One, new orders for capital goods remain strong. Businesses are looking to investment in new equipment. This should make workers more productive. However, the massive increases in new orders, measured in dollars, do not look as strong on an inflation-adjusted basis. The good news is even inflation-adjusted new orders remain above pre-pandemic levels. This is at least in part due to strong sales and manufacturing production overall, but could lead to better productivity moving forward.

Two, new business formation remains strong. New firms are usually best able to bring new products, services, and efficiencies to the market. Should this new generation of businesses do likewise, productivity could improve in the years ahead, even as the creative destruction process results in a few more business closures along the way. To date the number of businesses in Oregon is higher than it was pre-pandemic. Closures are up, particularly in hard-hit industries like leisure and hospitality, but new firms are beginning to take their place.

For more on start-ups in Oregon see here, and for more on the types of capital and productivity in Oregon see our office’s previous work.

Posted by: Josh Lehner | May 4, 2022

Cyclical Labor Shortage is Gone, Structural Remains

Labor market dynamics are shifting. Job growth will be more balanced across industries. Job gains will moderate in a full employment economy, slowing aggregate wages along the way, which should help lessen some inflationary pressures as well. However, a structural labor shortage remains given the strength in the underlying economy and firms struggling to fill positions due to pandemic-related changes.

Let’s start with the good news. Today, we are no longer talking about cyclical labor supply issues related to the recession, the pandemic, lack of in-person schooling, enhanced unemployment insurance benefits, or anything like that. Those are all in the rearview mirror. Labor supply has rebounded considerably in the past year, over which time Oregon added more than 100,000 jobs. The U.S. has added more than 6 million jobs over the same time period. Folks are not just sitting on the sidelines waiting to return; they have already returned. The share of the prime working-age population that has a job today is effectively has high as we have experienced this millennium.

For firms it may have felt like pulling teeth to reach this point. We know labor demand increased quickly given strong household incomes and consumer spending. Workers have returned to take advantage of the more-plentiful and better-paying opportunities, although this return was slower than the increase in job openings. But we have now reached the point where employment levels today are essentially back to where they were pre-pandemic. And encouragingly, the labor force participation rate for the prime working-age group has likewise rebounded and is now just a hair below the pre-pandemic peak nationally.

So if these cyclical issues are largely gone, why does a labor shortage remain? This is where the bad news comes in. Besides the strong underlying economy, which is a big part of it, I see a combination of three shifts during the pandemic, and three big structural changes.

In terms of the three pandemic shifts, the first is that self-employment is up. About 20,000 more Oregonians are self-employed today than in the years leading up to the pandemic. Second, there are around 16,000 fewer multiple jobholders today. Both of these trends mean the number of Oregonians with a job is higher than the underlying payroll job counts indicate, which is something we see comparing the household and establishment surveys.

The third pandemic shift has been the increase in the number of workers quitting their jobs. Now, they are not quitting and dropping out of the labor force. Rather they are quitting one job to take another one. Quits in Oregon are up about 5,000 per month. Combined, all three of these factors leave businesses with more job vacancies today even if their desired staffing levels are the same as pre-pandemic.

In terms of the structural factors, the first is the outright decline in foreign-born workers as discussed before. A silver lining here is that in the past handful of months the U.S. numbers have really rebounded. That has yet to show up in the Oregon data, but should in the months ahead. There is a risk here that some of these observed changes — both up and down — in the data are noise from a small sample of a hard-to-reach population. Even so, we know international immigration has slowed considerably even if such outright declines end up being noise.

Second, we cannot ignore the tragic loss of life from the pandemic itself. Oregon has suffered 9,500 more deaths in the past two years than our office was expecting pre-pandemic. This “excess death” type calculation is likely to rise further, and is larger than the 7,500 official COVID-19 deaths to date. Adjusting these deaths by age and labor force participation rates finds that Oregon lost an estimated 2,500 workers during the pandemic. Such a figure is equal to about one month’s worth of job gains in a full employment economy, and unfortunately is a structural factor.

Finally, the biggest reason for a tight labor market today and in the years ahead are demographics. The big Baby Boomer generation is retiring, something our office has been highlighting repeatedly over the years. The new, younger entrants into the labor market are a steady, but not increasing flow due to the declining birth rate in recent decades and slower migration during the pandemic. The bottom line is the labor market is and will continue to be structurally tight for these demographic reasons.

Overall the good news is the cyclical issues we have been worried about are effectively gone. The bad news is we still have an “unsustainably hot” labor market in the words of Federal Reserve Chair Powell. Most of this is now due to structural factors like excess demand, and mediocre demographics. Tighter monetary policy can, and will help with the former, while the latter will only change with broader societal shifts or, say, increased immigration both international and domestic in the case of Oregon.

Posted by: Josh Lehner | April 27, 2022

Goods Production is Strong

Consumer spending on physical goods remains robust. It accelerated earlier in the pandemic as we still had strong household finances but either couldn’t or didn’t want to spend on services like going out to eat, on vacations, performing elective surgeries, and the like as much as we used to. The increases in spending on physical goods has held up, even as service spending has rebounded. Today, consumer spending on goods is 19% above pre-pandemic trends, and even after adjusting for inflation it remains 8% above trend. Given household finances, the baseline outlook is for more of the same. Should they want to, consumers can afford to maintain their higher goods spending, while also increasing their service spending.

This matters economically because the strong consumer demand for goods is driving a more robust than expected manufacturing recovery. Industrial, and manufacturing production are higher today than at any point since the Great Recession. Our factories, warehouses, and logistics are all producing and moving record volumes of products trying to keep up with the strong consumer demand.

According to the latest Federal Reserve data, U.S. manufacturing production is now 4% above the pre-pandemic peak. Our office takes the U.S. data and reweights it based on our local manufacturing subsector employment trends. That estimate of Oregon manufacturing production is running a bit stronger and is now 5% above pre-pandemic peaks. While this is not an exact measure of Oregon production, what it does tell us is that the industries that Oregon has larger concentrations in are doing better than the industries in which we have smaller concentrations. Our more modern mix of manufacturing is benefiting our overall economic recovery.

And of course, to produce enough products to meet demand, it means business investment and employment need to increase. Unfortunately, from a historical perspective, manufacturing employment doesn’t fully recover from recessions in recent generations. Specifically, in Oregon, manufacturing employment has not fully recovered from a recession since the 1990s. Nationally, US manufacturing employment has not fully recovered from a recession since the 1970s. However, this time may be different. Today, we are pretty close to a full manufacturing employment recovery. Both in Oregon and across the country, manufacturing employment is 1% lower that just prior to the pandemic. Although to be fair, employment is down a bit more from the peaks reached prior to the trade war back in 2018 and 2019, which resulted in some lost jobs leading into the pandemic.

A few additional notes and comments:

It is clear the good news outweighs the bad. That said there are two weak spots in Oregon’s manufacturing recovery: primary metal manufacturing employment is down 25% and transportation equipment is down 13%. Combined, all other subsectors are fully recovered and individually they are all at least close to a full recovery or better.

The overall strength in manufacturing employment is encouraging, if not a bit surprising given that wage growth has lagged. We know that both the career path for manufacturing is good but also that the manufacturing wage premium has been declining. There are a lot of low-wage, and entry-level type positions within the sector. Wages are rising during the pandemic. However these gains, at least for the average worker, have not kept pace with the broader economy. In fact, for the first time in which we have data the average manufacturing wage excluding computer and electronic products* is below the overall average wage in Oregon. Today the manufacturing wage premium is negative.

Wood products is the only manufacturing subsector to see above average wage gains over the past two years. This makes sense in the context that demand for wood products has been very strong during the pandemic. And with higher lumber prices, firms can pay higher wages to attract and retain workers to increase production. All other subsectors have seen wage gains, but near the average or slower.

Finally, in terms of the outlook there are a few important things to consider.

First, the baseline outlook calls for steady spending on goods, and therefore ongoing solid production and employment numbers. That said, the risks are weighted toward the downside. Should sales slow due to inflation causing demand destruction, to the pandemic-induced demand being met and fading away, or to consumers shifting out of goods and back into services, then we would see the local production and employment numbers soften as well. This could be outright declines, or just slower gains moving forward.

Second, current geopolitical events are muddying the picture. The war in Ukraine impacts energy and production costs, in addition to creating some global supply chain issues as it drags on. Similarly, the shutdowns in China will likewise impact global supply chains where the U.S. will see somewhat fewer imports for some period of time. This means fewer consumer products, but also fewer imported manufacturing inputs which could impact domestic production as well. The good news is these are more likely to be temporary disruptions, but disruptions nonetheless.

Bottom Line: The manufacturing recovery continues to outpace expectations. Production and employment are strong, as consumers continue to demand higher volumes of physical goods. This cycle is different. We may see a full manufacturing employment recovery for the first time in decades, or at least get really close. The outlook is not without risks, most of which are weighted toward the downside. In the meantime, expect manufacturing wage growth to pick up in order to attract and retain workers in a tight labor market.

* Due to composition of the computer and electronic products workforce, which is mostly higher paid engineers and white collar professional types, we exclude the wages here to get a better gauge of underlying wages in manufacturing

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